China: Brief Review Of The Newly Revised Chinese Anti-Unfair Competition Law

Last Updated: 15 March 2018
Article by Stephen Crosswell

On 4 November 2017, the Anti-Unfair Competition Law of the People's Republic of China (the AUCL) was amended for the first time since its promulgation and implementation 24 years ago in 1993, and the revised AUCL (the Revised AUCL) came into effect on 1 January 2018. Since announcing the proposed revision of the AUCL, there have been heated discussions, especially within and amongst intellectual property related industries and professionals. The revisions to the AUCL reflect changes to and developments in the socialist market economy over the past two decades, and specifically seek to refine legal concepts in the area of anti-unfair competition law, increase the legal responsibilities of business operators and strengthen enforcement measures, so as to create a more advanced anti-unfair competition system.

As the amendments to Article 2 (on the scope of applicability of the AUCL), Article 6 (on "confusing behaviors"), Article 9 (on trade secret violations) and Article 12 (on unfair competition activities committed on the internet) are particularly worthy of note, the abovementioned amendments will form the subject of the discussion below.

I. Article 2 of the Revised AUCL – refinement of its scope and clarification that it operates as a "catch all" provision

In practice, Article 2 of the AUCL was often used as a general catch-all provision, and played an important role in "catching" new or atypical acts of unfair competition.

In a draft revision of the AUCL, attempts were made to clarify the applicability of Article 2. Originally, draft Article 15 provided that with regard to behavior which has a serious adverse impact on the competitive environment and in respect of which the applicability of Article 2 falls to be considered, the Administration for Industry and Commerce under the State Council shall, independently or together with relevant departments under the State Council, investigate and render an opinion on whether the act should be regarded as an act of unfair competition, and report the same to the State Council for its decision. However, as such an amendment would increase uncertainty and the difficulty in applying Article 2, draft Article 15 was not adopted. Instead, Article 2 was revised, and Article 17 included to confirm that legal liability will attach to all acts of unfair competition which compromise the legitimate rights and interests of business operators. Such amendments enlarge the scope of Article 2, and in the eyes of many academics and practitioners, confirm that Article 2 of the Revised AUCL is a general provision that can be directly relied upon.

II. Article 6 of the Revised AUCL – clarification of the term "confusing behavior"

1. Meaning of "confusing behavior"

Article 6 of the Revised AUCL replaces Article 5 of the AUCL, and no longer includes paragraphs (1) and (4) in Article 5. As a result of the amendments, "counterfeiting another's registered trademark" and "forging or fraudulently using quality marks on goods, or geographical indications, so as to mislead consumers as to the quality of the goods" will no longer be considered acts of unfair competition. The deletions aim to clarify the boundaries between, amongst other laws, the Revised AUCL, the PRC Trademark Law and the PRC Product Quality Law.

Further, the revised Article 6 elaborates on the meaning of "confusing behavior". Behaviour is only "confusing" if it is or is likely to be misleading in that it causes or is likely to cause another to misidentify the source of the goods or to mistakenly believe that there exists some sort of connection between the goods and the brand owner. Under Article 6, there are four types of "confusing behavior", the first three of which are deemed to have the effect of misleading people in the abovementioned manner: (1) using or copying the name, packaging or decoration of another's famous goods, (2) using another's trade name, (3) using another's domain name, website name or any other name in the internet context, and (4) other confusing behaviors. Type (4) is a residual open-ended category and would catch for instance the use / copying of the overall appearance of another's goods, the names and colour schemes used in the marketing of another's goods etc., provided that confusion can be established.

Additionally, previously, Article 5 required the "name, packaging and decoration of famous goods" to have achieved "well-known status" under sub-section (2) of paragraph 1 before they could be afforded protection, whereas this "well-known status" requirement did not apply to other names, such as trade names (though a Supreme People's Court interpretation stipulated that only those trade names that are known to the relevant public and enjoy a certain degree of fame could be afforded protection). Now, instead of imposing a "well-known status" requirement, Article 6 of the Revised AUCL imposes a "certain degree of influence" requirement, which extends to all types of names. Such amendment is logical as it is only when names, indications etc. have achieved a certain degree of influence and are familiar to the public that confusion can arise.

The "certain degree of influence" requirement sets a lower threshold than the "well-known status" requirement. For further guidance as to what the "certain influence" requirement entails, reference can be made to Article 32(1) of the PRC Trademark Law (re prior use of trademarks with a certain degree of influence), and the way in which the provision has been applied in practice.

2. Stipulation of the legal consequences for engaging in confusing behavior and provision for harsher administrative penalties

Article 18 of the Revised AUCL clearly stipulates the potential legal consequences that could follow from violating Article 6, including an order to cease the infringing acts, a confiscation order in respect of the infringing commodities, and/or administrative fines. Article 18 also increases the maximum amount of administrative fines that can be imposed, from up to three times the amount of the illegal turnover to, if the illegal turnover is greater than RMB 50,000 (approx. USD 7,400), up to five times the amount of the illegal turnover, and if the illegal turnover is less than RMB 50,000 or if no illegal turnover is generated, up to RMB 250,000 (approx. USD 37,000).

3. More practical legal measures to correct confusing trade names

In practice, some enterprises take advantage of loopholes in the trade name registration system to register another's registered trademark or trade name as one's own trade name. Such registrations easily cause consumer confusion and infringe upon the lawful rights of prior right-holders.

Article 58 of the PRC Trademark Law, which came into effect on 1 May 2014, provides that: "Where one uses another's registered trademark or unregistered well-known trademark as or in one's own trade name in a manner that misleads the public and results in unfair competition, such matter shall be handled in accordance with the PRC Anti-Unfair Competition Law." Article 6(2) of the Revised AUCL corresponds with Article 58 of the PRC Trademark Law.

However, prior right-holders often face problems enforcing administrative and judicial decisions, mainly because the current legal regime requires the infringing entity registering or using the prior right-holder's name to be the one to change or deregister the infringing trade name, and in many cases, the infringing party refuses to cooperate. Article 18(2) of the Revised AUCL aims to rectify this legislative shortcoming by providing that: "Where a registered trade name is in violation of the provisions of Article 6, the registrant shall apply for a change of name in a timely fashion. Before the change is effected, the original enterprise registration authority shall replace the registrant's name with its uniform social credit code". This provision for the first time clearly stipulates in legislation specific administrative corrective measures that are to be taken to combat inappropriate trade names, which will be of help in the fight against copycat brand names.

Having regard to this change, prior right-holders should, when they initiate civil litigation against infringing parties, request the infringing party to change its trade name, rather than deregister its infringing trade name. Otherwise, the administrative authorities responsible for effecting the name change may refuse to cooperate on the basis that the court decision requires deregistration instead of modification.

As mentioned above, under the Revised AUCL and other relevant regulations, prior right-holders can require the original enterprise registration authority to replace the infringing party's trade name with its unified social credit code on the State Enterprise Credit Information Disclosure System if the infringing party refuses to change its trade name. However, even if the original enterprise registration authority replaces the infringing party's trade name with its unified social credit code, it remains to be seen what would happen if the infringer continues to use the infringing trade name. The infringer may still possess and use its business licence and other certificates listing the infringing trade name, and the administrative management authorities will need to issue additional regulations to address this issue.

III. Article 9 of the Revised AUCL – trade secrets

The Revised AUCL broadens the definition of "trade secrets", from one which requires the secret to have "practical value" to: "... technical information or business information which is unknown to the public, has commercial value and in respect of which the right owner has taken corresponding measures to ensure its confidentiality."

Additionally and more importantly, the Revised AUCL makes provisions for third-party infringement in cases where the proprietor of the trade secret is the employer of the trade secrets infringer. Under the Revised AUCL, a third party will be held to have infringed upon a proprietor's trade secret if the third party was aware that the proprietor's employee or ex-employee, another organization or an individual had obtained the trade secret through illegal means. This is a commendable improvement as it increases protection of employers' trade secrets and deters third-party infringement.

Another important change is the increase in penalties for violating trade secrets. Under Article 17 of the Revised AUCL, the maximum statutory compensation payable in civil cases is now RMB 3 million (approx. USD 441,000), up from RMB 1 million (approx. USD 147,000). Furthermore, administrative penalties have increased under Article 21 of the Revised AUCL, and parties who have violated trade secrets are now liable to be punished with fines of between RMB 100,000 and RMB 500,000 (approx. USD 15,000 to USD 74,000), or between RMB 500,000 and RMB 3,000,000 (approx. USD 74,000 to USD 441,000) in serious cases. Finally, the revised law requires authorities to maintain the confidentiality of trade secrets during investigation.

IV. Article 12 of the AUCL – addition of new provisions on internet related unfair competition activities

With the continuous development of social and economic conditions as well as the internet in China, a large number of cases in respect of internet related unfair competition activities have arisen. Previously, the good faith principle under Article 2 of the AUCL was often used by courts in such cases. However, Article 12 of the Revised AUCL now specifically addresses unfair competition activities conducted on the internet, which are specified to include (1) inserting links to a network product or service offered by another without that other's consent, which, when clicked on, automatically redirect the user to pages of other targets; (2) misleading, deceiving or forcing users to revise, shut down or uninstall a network product or service offered by another; (3) maliciously making a network product or service offered by another incompatible with one's own products or services, and (4) engaging in any other act that interferes with or sabotages the normal running of a network product or service offered by another.

Article 12(1) to (3) is a codification of recent important court decisions, such as Baidu v Qihoo (the flagging search results and hijacking traffic case) ((2014) Min Shen Zi No. 873) and Tencent v Qihoo (the "Kou Kou Bodyguard" case) ((2013) Min San Zhong Zi No. 5). As an exhaustive list cannot comprehensively capture every act of unfair competition committed on an evolving internet with constantly changing technologies and business models however, Article 12(4) was also included to serve as a catch-all provision to cover unforeseeable internet cases.

In terms of the penalties that can be imposed for engaging in acts of unfair competition on the internet, Article 24 of the Revised AUCL sets out the administrative penalties. In respect of civil liabilities, unlike Article 6 (re engaging in confusing behavior) and Article 9 (re violating trade secrets), the newly Revised AUCL does not set out a statutory compensation scheme for violations of Article 12, and in previous unfair competition cases involving the internet, courts have awarded compensation of up to RMB 5 million (approx. USD 735,000) (e.g., Tencent v Qihoo "Kou Kou Bodyguard" case)

In sum, the newly Revised AUCL provides more specific guidance on what constitutes "confusing behavior" and an act of unfair competition on the internet, and also adopts broad descriptions and catch-all provisions to address new forms of unfair competition in the market. Additionally, the AUCL increases penalties for specific acts of unfair competition and provides for more practical remediable measures to be adopted. These provisions will help maintain market order and the competitive environment, and safeguard the legitimate interests of business operators. We await application of the relevant provisions and measures by way of administrative and judicial enforcement, to further clarify the meaning and applicability of provisions of the Revised AUCL.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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